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Codan (CDA AU) is an Australian small-cap dominating the niche for high-end metal detectors. It also produces communication equipment for use in remote locations.
It bears the hallmarks of a “hidden champion”: global leadership within a niche, a strong brand name, operating margins of 25% and a return on equity of about 30%. Codan’s strong market position has enabled the company to compound capital at a rapid rate.
The company was started by three friends from the University of Adelaide in 1959, initially focusing on radio devices used in the Australian outback. In 2008, Codan acquired fellow Adelaide company Minelab, known for its high-end metal detectors.
Today, Codan’s revenues are split 50/50 between the metal detector and the communications business. But thanks to much higher margins in the metal detector segment, Codan’s operating profit is still driven by the metal detector segment.
The metal detectors are sold under the “Minelab” brand name. They cost anything from US$500 to US$10,000 apiece.
So why would you pay US$10,000 for a metal detector? Because they’ll be able to find smaller gold nuggets deeper into the ground, with added functionality such as GPS connectivity. Competitors like Garrett and Nokta have difficulty competing in the higher-end segment.
In Codan’s communication segment, it serves militaries and government agencies needing encrypted communication, often in remote locations where there’s no existing infrastructure. Products include transceivers, handheld radios, radio coverage repeaters, encryptors, power solutions, etc.
Codan enjoyed strong growth during the initial stage of COVID-19. Hobbyists bought metal detectors with their stimulus money during a period when outside exercise and social distancing were encouraged. Also, artisanal miners bought equipment as larger gold mines shut down due to supply chain issues. And many individuals who lost their jobs in the pandemic also turned to gold prospecting.
Since then, demand for Codan’s metal detectors has slowed considerably, causing Codan’s inventories to rise. The company’s 1HFY2023 guidance for the metal detector segment was weak, causing estimates to drop.
A few positives are starting to emerge. Insiders are buying shares in the open market. Back in August, new CEO Alf Ianniello said that inventories had probably peaked. Four new coin & treasure detectors will be released by the end of the calendar year 2022 and early 2023. And management guidance for FY2023 and FY2024 is optimistic.
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